Federal Law on Dealer Regulations

Licensing Requirements

Federal law prohibits any person from engaging in the business of dealing in firearms without a federal firearms license.1 As applied to a firearms dealer, the term “engaged in the business” is defined as:

[A] person who devotes time, attention, and labor to dealing in firearms as a regular course of trade or business with the principal objective of livelihood and profit through the repetitive purchase and resale of firearms, but such term shall not include a person who makes occasional sales, exchanges, or purchases of firearms for the enhancement of a personal collection or for a hobby, or who sells all or part of his personal collection of firearms.2

The Gun Control Act of 1968 established the federal licensing system for firearms dealers. According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”), however, that system was “overly simple” from 1968 until 1993.3 During that time, any person who was over 21, paid a $10 annual fee, had premises from which to operate, and was not prohibited from possessing firearms was issued a license.4 As a result, the number of FFLs soared, reaching a peak of more than 284,000 in 1992.5 In 1993, ATF estimated that 46% of all FFLs conducted no business at all, but used their licenses to buy and sell firearms in violation of state and local zoning or tax laws.6

In 1993 and 1994, Congress adopted laws to strengthen the licensing system. The Brady Handgun Violence Prevention Act of 1993 (“Brady Act”) increased the license fee to $200 for the first three years and $90 for each additional three-year period.7 That law also required applicants to certify that they had informed local law enforcement of their intent to apply for a license.8 The Violent Crime Control and Law Enforcement Act of 1994 required an applicant to submit photographs and fingerprints and certify that their business was not prohibited by state or local laws, and ensure that the applicant would, within 30 days, comply with such laws.9

The FFL population decreased substantially as a result of these reforms. By 1997, after the first three-year cycle of re-licensing under the new laws had been complete, the number of FFLs had dropped by 49% nationwide, to 107,554.10 As of December 1, 1999, that total had fallen to 103,845, the lowest number since 1969.11 The total number of FFLs has remained significantly below pre-reform levels. As of 2007, there were 108,842 FFLs nationwide.12

The number of “Type 1” FFLs (dealers licensed to sell firearms, as opposed to those licensed to manufacture firearms or sell ammunition or curios) saw an even more dramatic decline since the reforms of the early 1990s. The number of Type 1 FFLs dropped 79 percent between 1994 and 2007 (from 245,628 to 50,630).13

According to ATF, the reduction in the number of FFLs has been beneficial because it has enabled ATF to inspect a higher proportion of licensees.14 ATF’s inspection of FFLs remains inadequate, however. The U.S. Department of Justice Office of the Inspector General issued a report in July 2004 assessing the effectiveness of ATF’s program for inspecting FFLs. That report stated:

We found that the ATF’s inspection program is not fully effective for ensuring that FFLs comply with federal firearms laws because inspections are infrequent and of inconsistent quality, and follow-up inspections and adverse actions have been sporadic. Specifically, the ATF does not conduct in-person inspections on all applicants before licensing them to sell guns, and ATF compliance inspections of active dealers, including large-scale retailers, are infrequent and vary in quality. Even when numerous or serious violations were found, the ATF did not uniformly take adverse actions, refer FFLs for investigation, or conduct timely follow-up inspections.15

Another study found that between 1975 and 2005, ATF revoked, on average, fewer than 20 federal firearms licenses per year.16 The report noted that in 2006, ATF increased its total revocations to 131.17 Furthermore, ATF prosecuted only 88 corrupt gun dealers between 2000 and 2002.18 ATF faces numerous obstacles that limit its ability to enforce the law. For example, ATF may conduct only one unannounced inspection of each FFL per year, the burden of proof for prosecution and revocation are extremely high, serious violations of firearms law have been classified as misdemeanors rather than felonies, and ATF has historically been grossly understaffed.19

The ability to conduct effective inspections and enforce laws against corrupt FFLs is crucial. According to ATF, one percent of FFLs are responsible for selling almost sixty percent of the guns that are found at crime scenes and traced to dealers.20 Therefore, identifying and stopping even one corrupt dealer could lead to a significant reduction in the number of crime guns.

For information about the Protection of Lawful Commerce in Arms Act (PLCAA), which immunizes licensed firearms dealers from certain civil lawsuits, please see the Immunity Statutes section.

FFLs must also submit to a maximum of one ATF inspection per year to ensure compliance with federal recordkeeping requirements.26 More frequent inspections are permitted if a federal magistrate has issued a search warrant or if the search is incidental to a criminal investigation.27 In addition, FFLs must respond to requests for information from ATF regarding the disposition of a firearm if such request is made during the course of a bona fide criminal investigation.28

A FFL may not sell or deliver: 1) a handgun to a resident of another state; 2) a shotgun or rifle or ammunition for that firearm to a person the dealer knows or has reasonable cause to believe is under the age of 18; or (3) a handgun or handgun ammunition to a person the dealer knows or has reasonable cause to believe is under the age of 21.29

FFLs may temporarily conduct business at a location other than that specified on the FFL’s license if the temporary location is a gun show in the state specified on the license.30

ATF has found that FFLs who violate federal laws are a major source of trafficked firearms. In June of 2000, ATF issued a comprehensive report of firearms trafficking in this country. That report analyzed 1,530 trafficking investigations during the period July 1996 through December 1998, involving more than 84,000 diverted firearms.31 ATF found that FFLs were associated with the largest number of trafficked guns – over 40,000 – and concluded that “FFLs’ access to large numbers of firearms makes them a particular threat to public safety when they fail to comply with the law.”32 Random inspections by ATF have uncovered that a large percentage of FFLs do violate federal law and that this percentage is growing.33

Finally, according to a 1998 ATF random sample of FFLs nationwide, 56% of all dealers operated out of their homes.34 Of the remaining 44%, 25% operated out of commercial premises that were gun shops or sporting goods or hardware stores.35 The rest of the dealers were located in businesses that are not usually associated with gun sales, such as funeral homes or auto parts stores.36

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